Apple's iPhone Dials Up a New Deferred Cash Hoard
Buyers of Apple's iPhone 3G typically sign two-year contracts when they purchase the swanky $525 device. But rather than record all the revenue at once, the iconic computer company will post roughly 72 cents in sales every day over the life of each of those contracts.
That's because Cupertino, Calif.-based Apple uses an unusual accounting method - deferred revenue accounting - to assess the hit device's impact on its financial performance. Under deferred revenue treatment, which Apple began using about a year ago, money received up front for a service isn't recorded until a service is provided. In the iPhone's case, Apple divides the price it charges operators by the 730 days of the contract.
Apple began selling the latest version of the iPhone, the 3G, after the close of its fiscal third quarter, so sales of the cellphone won't be reflected when it reports earnings on Monday. But increasingly, analysts say the accounting treatment means a huge and continuing revenue payoff for Apple that plays out on its top and bottom lines for years to come. As more investors notice, the enduring benefits of the accounting treatment could help Apple shares recoup the 14% they've dropped so far this year.
Deferred revenue is like "money in the bank" or an "uncashed check," said Stephen Rosenmen, who contributes to the Seeking Alpha investment Web site. "These deferred revenues have become substantial."
Apple uses deferred accounting because it is required to by the Sarbanes-Oxley Act, a 2002 law that established new accounting regulations.
Apple had no comment for this story.
How substantial the deferred revenue will be is open to interpretation. Several scenarios suggested by Wall Street analysts have iPhone deferred revenue adding $1 or more to Apple's earnings per share each quarter starting in calendar 2009. The gains jump significantly after 2010 because Apple is expected to sell upwards of 45 million of new iPhones in 2009 and again in 2010.
As of the end of its fiscal second quarter, Apple had $3.8 billion in deferred revenue - about a tenth of its total expected sales in fiscal 2008 - from sales of its initial iPhone and Apple TV, which lets you rent videos directly from televisions. That's double the revenue that International Business Machines Corp. (IBM) and Microsoft expect for the quarter. If sales of Apple's new iPhone 3G meet expectations, the company's stockpile of deferred revenue could rise to $5.3 billion in 2010, or about 15% of overall expected sales.
Though the deferred-revenue recognition will benefit Apple over the long run, it pressures the company's top-line growth in the near term because millions of dollars in iPhones and iTV products that have been sold to consumers won't completely reach its books for years. That means investors will look to Apple's computer sales, which are treated in more traditional ways, to drive the top-line growth they have become accustomed to seeing each quarter.
Investors are unlikely to be disappointed when Apple reports its fiscal third-quarter results on Monday. Earlier this week, two research firms said Macintosh sales continue to thrive even though the U.S. economy is struggling and Asian and European markets are starting to weaken.
Apple is expected to post $1.07 in earnings per share on revenue of $7.36 billion, according to analysts surveyed by FactSet Research, a data provider. During the same period a year ago, Apple earned 92 cents a share, on $5.41 billion in sales.
Apple's Macintosh computer shipments to the U.S. grew 31.7% to 1.3 million in the calendar second quarter, and its 7.8% share of the U.S. market is now 3rd overall, and in a dead heat with Taiwan's Acer Inc., according to research provider Gartner.
Apple shares recently traded at $167.07, down 2.8% Friday but still up nearly 45% from its February low.
-By Ben Charny, Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com
(END) Dow Jones Newswires
Posted to the site on 18th July 2008
